Obama budget targets carried interest

President Obama today released his $3.8 trillion budget proposal for fiscal year 2013, and once again he is proposing to change the tax treatment of carried interest from capital gains to ordinary income.

Here is the section (pg. 40):

Tax Carried (Profits) Interests as Ordinary Income. Currently, many hedge fund managers, private equity partners, and other managers in partnerships are able to pay a 15 percent capital gains rate on their labor income (on income that is known as “carried interest”). This tax loophole is inappropriate and allows these financial managers to pay a lower tax rate on their income than other workers. The President proposes to eliminate the loophole for managers in investment services partnerships and to tax carried interest at ordinary income rates. This would reduce the deficit by $13 billion over 10 years.

Two things to note:

(1) Obama neglects to identify venture capitalists as one of this tax loophole’s main beneficiaries, likely because VCs are more politically popular than are private equity or hedge fund managers. But, make no mistake, VCs would effectively have their taxes doubled by this change (which I support, by the way).

(2) Obama projected $14.8 billion in extra tax revenue from changing carried interest in his FY2012 budget, but only $13 billion in his FY2013 budget (as first spotted by @jenrossa). Don’t know if they changed the equation, or if this reflects an acknowledgment that the private equity market is slowly shrinking in terms of capital under management.